A Look At News Corp’s Q1 And Beyond

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News Corp‘s (NASDAQ: NWSA) first quarter earnings per share came in ahead of market expectations, but revenues missed consensus. In Q1, the company’s revenues grew 23% year-over-year (y-o-y) to $2.5 billion, primarily due to continued growth in the Digital Real Estate business and Book Publishing segment. It should be noted that News Corp consolidated Foxtel and Fox Sports Australia (including Sky News), reflecting in the newly formed revenue segment Subscription Video Services. This consolidation will make circulation and subscription revenues the biggest revenue stream for News Corp for the first time, guarding the company against the volatile advertising market. In addition, the company’s total earnings before interest, taxes, depreciation, and amortization (EBITDA) grew more than 40% y-o-y, and it posted a net profit of $101 million as reported.

Our $17 price estimate for News Corp’s stock is almost 30% ahead of the current market price. We have created an interactive dashboard on What To Expect From News Corp’s Fiscal 2019 Earnings which outline our forecasts for the company’s full-year fiscal 2019 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

What Drove News Corp’s EBITDA?

The 44% y-o-y increase in EBITDA includes the $48 million benefit related to News UK’s exit of the gaming partnership with Tabcorp for Sun Bets. News Corp’s overall EBITDA grew due to the continued strength in the Book Publishing and Digital Real Estate Services segments. The company’s net income, restructuring charges, and D&A expenses grew year-over-year, leading to growth in total EBITDA. Below, we illustrate the various factors that were responsible for the company’s EBITDA growth.

Digital Real Estate – The Engine Of Growth

Digital Real Estate is News Corp’s fastest-growing segment. The segment contributes 44% of the total company EBITDA, which is almost four times the amount of the company’s other segments individually. This is largely due to the relatively low-cost nature of the business. In Q1, Digital Real Estate segment revenues increased 8% y-o-y to $418 million, and the segment’s EBITDA grew 11% y-0-y, largely due to continued growth at REA Group and Move. The company also completed the acquisition of Opcity, a market-leading real estate technology platform, which should further enhance realtor.com’s lead generation offerings and also drive higher revenue growth. However, the company expects around $3 million per quarter in costs relating to the deferred payments and equity grant due to this acquisition.

Q2 Trends

In Subscription Video services, the company will launch its sports OTT product and begin to amortize the Cricket Australia rights. The rights and production costs related to that should be around $25 million to $30 million for the second quarter. In Book Publishing, overall trends remain favorable with digital contribution rising modestly. The upcoming release slate includes Homebody, The Next Person You Meet in Heaven, and Hindsight & All The Things I Can’t See in Front of Me, in addition to strong backlist sales.

Future Outlook

The combination of the Digital Real Estate Services and Subscription Video Services segments is expected to account for well over half of News Corp’s profits. At News and Information Services, while pre-advertising trends continue downwards, they have been relatively stable though visibility remains limited. As a consequence, the company is focused on driving higher penetration of digital paid subscriptions, particularly in Australia and at News UK in fiscal 2019. At Subscription Video Services, the company will focus on launching new OTT products, 4K, the next generation of the IQ Box and managing its broadcast base. In Book Publishing, underlying trends seem relatively stable and the company will be focused on its foreign language penetration.

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